Is the Housing Bottom Finally in Sight?

Housing prices will stop sinking next spring. But recovery will be a gradual process -- too slow to help the economy much next year. Look for prices, which have fallen an average of 31 percent since 2006, to drop an additional 2 percent or so in the early months of 2012 and then recover that lost ground by the end of the year.

The growth in 2013 won't be dramatic come 2013, expect home prices to rise only 3 percent to 4 percent -- not too far from the pre-boom average of 4.8 percent a year, but well short of the bounce that usually follows a housing slump. After the milder housing downturn in the early 1980s, home prices grew an average of 6.5 percent for six years.

A key signal that the bottom is near: A change in the ratio of average homes prices to personal income -- houses are affordable again. After soaring to 4-to-1 during the housing boom, the ratio is now well below the long-term average of 3-to-1.

Another reason for optimism: Foreclosure numbers are set to level off after a recent surge to clear up the backlog that developed when banks were found to be rushing though the paperwork for seizing homes. Although the 3.5 million foreclosures still in the pipeline are weighing heavily on the housing market, that effect will diminish when it is clear that the worst has passed.

Look for home sales to tick up next year as well, hitting 5.5 million for new and existing homes. That's up 4 percent from 2011, the low point since the housing bubble burst.

Demand from abroad will help. Canadians are buying homes in Phoenix; Brazilians are investing in Miami; and Chinese are buying in California, Las Vegas and New York City. To these investors with bulging pockets, good values can be found where the price declines have been greatest.

U.S. investors remain more conservative, largely avoiding single-family homes and diving into the multifamily rental market. It has heated up in recent years, thanks in part to the crowds of former homeowners who need a place to live, as well as to would-be home buyers who are waiting to see if prices have further to fall.

Home starts will jump 15 percent next year, driven largely by construction of new apartment buildings. Among the strongest areas are Texas, Louisiana, Oklahoma and the Dakotas, where the robust energy industry is lifting local economies and earlier overbuilding was avoided. Other states that have benefited from past restraint are Montana, Washington, Iowa and Nebraska.

Even so, new construction will be only around 750,000 in 2012, down from 2 million in 2005 and far below the pre-crash average of 1.5 million from 1959 through 2006.

Farther down the road, there is plenty of pent-up demand. The lousy housing market has muffled the typical rate of household formation, deterring many young folks from getting their own homes. As a result, there are 2 million new households waiting for an improvement in economic conditions: recent graduates eager to leave their parents' nests and 30-something couples who have delayed marriage or having children. As the economy picks up steam, they will emerge, helping to soak up the glut of foreclosed homes and putting construction on a faster track.

By 2014, the housing market will start to look more like its old self, with housing starts near the long-term average of 1.5 million a year, sales of about 6 million and price gains of over 4 percent a year.

Shorter term, even the modest reversal likely in 2012-2013 is crucial, easing the crushing weight the housing market has imposed on the economy. Homeowners, who lost a large share of their net worth in the housing crash, have been trying to rebuild their wealth by saving more in recent years. Since the market crash, consumers have held on to more than 5 percent of income, up from less than 2 percent during the housing boom. Since consumer spending accounts for two-thirds of economic activity, this uptick in saving and correlating downtick in spending has spelled the difference between a solid recovery and the shaky one the U.S. is experiencing.

Since a good deal of this saving is due to uncertainty -- not knowing just how much more home prices will drop -- reaching a clear turning point is important. Once homeowners know the worst is over, they'll take a breath, start planning their saving for the long term and spend more in the short term.

Of course, the market shift won't make much immediate difference for the millions of homeowners who owe more than their homes are worth. But for the majority with equity in their homes, even a modest gain in prices can change their spending behavior.

Like most of the state of Florida, the Orlando-Kissimmee-Sanford statistical area was hit hard by the housing crisis. More than one in five homes in the region is vacant, and more than half of all owned homes are now worth less than the mortgages on them. Real estate prices have declined 53.4% since the 2006 peak. By the second quarter of next year, Fiserv projects median home values will decline an additional 11.4%. For every person in the region looking for a home elsewhere, 1.87 people are looking at real estate in the area.

Click through to see what the median price buys in Orlando.

Location: Orlando, Fla.
Price: $140,000
Beds/Baths: 3/3
Sq Ft: 1,510

This single family delivers comfortable living on the cheap. A sophisticated interior boasts arched doorways and hardwood floors. Features include an eat-in kitchen, backyard patio and one-car garage.

Almost two out of every three homes with a mortgage in the Las Vegas-Paradise metropolitan area is underwater — meaning the home is worth less than the mortgage on it. This is, by far, the highest rate in the country, and it is 10 percentage points greater than the metro area with the second highest rate. Since the first quarter of 2006, the median home value has dropped nearly 60% in this statistical area, and it is expected to drop another 15.9% by the middle of next year. Nearly 40% of the homes sold in the area had previously been foreclosed upon.

This cozy home is an economical choice whose low price sheds light on just how much of a hit Vegas took from the housing meltdown. The home offers mountain views, neat landscaping, ample lighting, access to a community pool and exercise facilities, marble kitchen countertops, a two-car garage, a backyard patio and an decent supply of appliances.

The Oxnard-Thousand Oaks-Ventura area of California forms part of the Los Angeles suburbs, and is one of the wealthier regions in the country. It also features some of the most expensive and desirable retirement homes in the country. The median home value is $400,000 — the ninth-highest in the U.S. But even that high price is nearly 40% down from its peak in the second quarter of 2006. Foreclosures in the region are up 24% from last quarter. Many wealthy individuals close to retirement are looking to this area for second homes at bargain prices.

Click through to see what the median price buys in Ventura.

Location: Ventura, Calif.

Price: $395,000

Beds/Baths: 3/2

Sq Ft: 1,878

Ventura, Calif. is a tad more upscale than some other buying hotspots, so it follows that homes are costlier. This 1,878-square-foot single family features a garage, patio and fenced backyard.

Fort Worth is unlike most of the areas on our list in some key respects. It is the only one of the 10 where home prices are expected to rise by the second quarter of next year, and the only city with an unemployment rate below the national average. The subprime mortgage crisis appears to have completely missed the Fort Worth area altogether. Home prices are down just 5.9% from their peak in 2009. According to Trulia, the biggest reason for the high rate of inbound searches is the large number of people looking to move from the nearby city of Dallas.

This new traditional offers quite a bit of space for its price tag and enjoys some charming landscaping. The home shows just how much bang for your buck home buyers enjoy if they opt for this city in the Lone Star State.

Homes in the West Palm beach area are worth less than half what they were before the recession. Many people have been unable to sell their homes, especially as values are projected by Fiserv to decline an additional 9.6% by the second quarter of 2012. Last year, West Palm Beach had more listings than all but a handful of major U.S. cities. However, inventory will likely be drawn down as foreclosures decline and people begin purchasing dirt-cheap real estate. Nearly one in four of the home sales in the region in the last 12 months was on a formerly foreclosed upon home.

You can live on the water for just over $200K if you purchase this gleaming, tile-floored condo. The unit offers three bedrooms and access to facilities including an expansive swimming pool and tennis courts.

There is arguably no single housing market with a worse outlook than southwest Florida, and Cape Coral-Fort Myers is the hardest-hit area. Housing prices here have already dropped 59.3% from their peak, and Fiserv projects a further decline of 12.2% by the second quarter of next year. According to Corelogic, 47% of the homes in the Cape Coral-Fort Myers area are worth less than their mortgages. Foreclosures have increased 35% in the last quarter. However, the long-term outlook may be better than these figures suggest. Real estate agents are giving “foreclosure tours” to show homes that are now worth 40% or less of what they were just five years ago, and the number of people looking for homes in the area is nearly double the number looking to leave.

Just five years ago, the median home price in the greater Fort Lauderdale area was nearly $400,000. As of last quarter, it was less than $200,000, and still falling. Prices are projected to fall an additional 9.2% by the middle of next year. The area is, however, one of the most popular retirement destinations in the country, and many see the current lows as an opportunity to purchase a cheap second home.

Click through to see what the median price buys near Ft. Lauderdale.

Location: Sunrise, Fla.
Price: $200,000
Beds/Baths: 4/2
Sq Ft: N/A

Sited on a generous, fenced lot, this four-bedroom boasts a recently upgraded kitchen and breakfast area and hardwood floors. Sliding glass doors open up to a wood deck in the back. HOA fees are low.

The Charleston-North Charleston area saw home prices drop nearly 23% since the 2007 peak. Nearly 10% of homes are vacant — one of the highest rates in the country. Charleston has been, and remains, a popular retirement destination. According to Trulia, most of the people looking at homes in Charleston are from other parts of the state and other southern cities.

Sheesh, that's a lot of room for $200K! The home sits on a quarter-acre landscaped lot and enjoys vistas of a nearby river viewable from the home's backyard porch. The interior has vaulted ceilings and hardwood floors.

This is one of the largest metropolitan statistical areas in the U.S. It also has one of the highest unemployment rates in the country — 13.4%. Poor economic conditions have led to a massive drop of over 55% since home prices peaked in 2006. Prices are projected to fall an additional 14.8% by the second quarter of 2012. The area has had massive foreclosures in the past few years, and nearly 40% of the homes sold in the last 12 months were previously foreclosed upon.

Last quarter, the rate of foreclosures in the North Port-Bradenton-Sarasota area jumped 57%, the third-greatest increase in the country. Since the first quarter of 2006, home prices have dropped 51.4%. Foreclosures are likely to increase for some time unless economic conditions improve, as 40.84% of regional homeowners owe more on their mortgages than their homes are worth. Further, prices are expected to drop an additional 6.5% by the second quarter of next year. For every person looking to leave the area, six others are searching for homes here.

At $88 per square foot this home -- which may have given its builder quite the headache since it was constructed just prior to housing meltdown -- seems like quite a bargain. It offers the usuals and a two-car garage. Throw some palm trees into the mix too.